Thursday, February 25, 2010

A Price Increase on Coated Paper? What is Abitibi Smoking?

AbitibiBowater stunned its customers today by announcing a huge price increase for coated paper – a move that is already DOA, thanks to Abitibi’s competitors.

The announcement says simply that prices for all coated groundwood papers, from standard #5 to high-brightness #4, will increase by $60/ton ($3/cwt.) on April 1.

A couple of months ago, low inventories and an economic recovery caused mills and prognosticators to talk about a possible increase in coated prices this spring. Manufacturers predicted that the expiration of black-liquor subsidies would cause paper machines (usually, someone else’s paper machines) to be shuttered. Some coated mills were unseasonably busy early this year as customers restocked their depleted inventories in advance of price increases.

But machine shutdowns never happened, the shaky economic recovery has mostly bypassed print advertising so far, and spot prices started drifting lower rather than higher.

Hopes for a price hike any time soon were pretty well dashed in the past week as word got out that the largest coated supplier, NewPage, had restarted two mothballed machines. So much for a tight market.

Then #2 Verso bragged to stock analysts yesterday that it “enjoys a distinct manufacturing cost advantage vs. its competition” in its “key product areas” – ultralightweight coated #5 (ULWC) and coated freesheet #3. Verso's presentation included a chart that shows it having a $567 cost per ton to make ULWC, versus a $634 average for the competition.

Between the two of them, NewPage and Verso have a bit more than a 50% share of both the coated-groundwood and coated-freesheet markets in North America. A significant price increase can’t get rolling without a significant push, and perhaps a loss of market share, by one of these leaders.

Verso executives told the analysts they would continue to “take market related downtime to match demand with supply” and to develop new products rather than dropping prices to keep their machines full. But with its apparent low-cost position, Verso seems unlikely to shut down capacity in hopes of driving up market prices.

And NewPage, which single-handledly propped up the coated market a couple of years ago by shutting down high-cost machines and mills, is clearly no longer up to the task of providing such market leadership. It lost $308 million last year despite receiving $304 million in black-liquor subsidies, which it won’t enjoy this year.

Restarting the two machines seems to be a sign of desperation for NewPage, paper-market analyst Verle Sutton pointed out this week. The heavily indebted company may be “running for cash” so that it doesn’t end up joining AbitibiBowater in Chapter 11 bankruptcy reorganization.

And what about coated freesheet? Next week’s decision on the anti-dumping case against some Chinese and Indonesian mills might boost the North American market. (The European Union launched a similar probe last week. Two of the the complainants -- Arjo Wiggins, known as Appleton Coated in the U.S., and SAPPI -- are also involved in the U.S. case.)

But Verso claims an average cost advantage of $61 per ton for coated freesheet, including a whopping $284-per-ton advantage against two competitors. It will be in no hurry to shut down profitable machines. And struggling NewPage has a huge 40% share of the North American coated-freesheet market.

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PaulyG said...

Michael Jackson in the Verso presentation said that he felt 1Q10 was the trough for pricing

Anonymous said...

Michael Jackson did state in his presentation at CS that he felt that 1Q10 is the trough for pricing.